WHEN IT COMES TO BUYING STOCKS, THE WORST OF TIMES ARE often the best of times. When circumstances look the darkest, the wisest investors start to stir on the sidelines. They look for sustained drops, the type of grueling periods during which many folks choose to exit the markets, and then jump. They swoop in and snare an opportunity to get in on our nation's historic prosperity at a cheap price.
As we enter a new year, we're betting 2002 presents just such an opportunity. After all, during 2001, every conceivable factor that could stack up against Wall Street did. Economic growth withered. A sluggish economy stymied consumer spending. Corporate profits--which many experts say is the engine that drives share prices--were socked. Then, late in the third quarter, terrorism struck an already woozy stock market and pushed it face-first into still worse declines.
The numbers tell the story. After a dismal 10.1% drop in 2000 (excluding dividends), by the end of September 2001, the S&P 500-stock index had fallen more than 20%. The Dow Jones industrial average lost 6.18% in 2000 and 17.98% by the end of September. And that's nothing compared with the performance of the Nasdaq composite index, which, after a glum 39.3% swoon in 2000, ended September 2001 down another 39.3%.
Even though the markets have been lower, investors need to be careful. "Investors are looking at substantial price drops and thinking stocks have to be cheap at this point," says Standard & Poor's investment strategist Sam Stovall. "However, that just isn't the case." Right now, he says, looking at the previous 12 months, stocks have been trading at an average price 25 times their profits, making them more expensive than the historic average price of 19 times their profits. Therefore, not every buy is a bargain, and there may be room for markets to go lower still.
With the market significantly down and a recession looming, sales revenues are bound to drop off and profit growth is sure to slump. Under those circumstances, C. Kim Goodwin, chief investment officer for U.S. Growth Equities at American Century, the Kansas City, Missouri, mutual fund company, says investors would do well to change their focus. "It's always important to look at earnings, but in this climate, we focus on improvement," she explains. "Look for companies where things are looking better over time; in some cases that might be a corporation that reports less negative earnings than the quarter before. The point is that there's an acceleration or an improvement to show."
So, here at BLACK ENTERPRISE, we've unearthed 22 stocks we feel give you the best chance to grab on to a solid, long-term position in the equity market. We've drawn the stocks from two screens of 11 companies each. Our first--a value screen--looks for neglected buys that should provide good, steady income with minimal risk even in a prolonged market downturn. Our second--a growth screen--is designed to home in on bargain companies that should sizzle the minute the economy picks up.
Think of a screen as a formula or recipe of ingredients used to guide computer software to select a batch of good stock picks. We used software developed by Zacks Investment Research, a Chicago firm that tracks Wall Street's rankings of stocks and acres of other financial statistics on virtually every publicly traded company. Our value sample dug up stocks that could continue doling out returns while withstanding more punishment should stocks continue to stumble. Our selection of growth stocks produced shares we felt were modestly priced...